By Mike Jones
NZD
Investors have started the week full of hope and promise, and this ‘feel good’ vibe has carried the NZD higher overnight. After starting the night around 0.8140, the NZD/USD climbed as high as resistance at 0.8200, before settling back to around 0.8180.
Yesterday’s rocket higher in the NZ PSI (to 57.4 from 49.9) probably helped underpin NZD sentiment, particularly when negative NZ data surprises were starting to become the norm.
But it’s mostly been a brightening in offshore risk appetite that has driven the currency higher. Optimism that a) the US fiscal cliff can be avoided and b) Greece’s next cart of bailout cash will be signed off this week has produced a night of sharp gains across global equity and commodity markets. The relative ‘safe-haven’ of the USD has been shunned as a result.
We’ve noted in the past that a “buy on dips” currency view appears to be prevalent amongst the NZ exporter community. This certainly proved to be the case last week.
According to our currency flows model, the NZD/USD slide through 0.8100 elicited some of the strongest net buy demand we’ve seen in two-years. Net flows for all NZD pairs were in the 94th percentile. In other words, over the past 2-years, net flows have been above this level only 6% of the time.
For today, there is no local data due for release. Across the Tasman, the RBA minutes could be interesting. Hints the RBA retains a clear easing bias (after standing pat earlier this month) would support the tentative recovery underway in NZD/AUD.
In contrast, if the minutes dampen expectations for additional policy easing (62bps worth is currently priced), the AUD will bounce, and the NZD/AUD will likely sink back towards support at the 200-day moving average around 0.7825. RBA Governor Stevens is also speaking at 8pm tonight. This is to business economists and promises to be market moving.
All up, we suspect the NZD/USD will have another look at 0.8200 resistance at some point today. And as long as European finance ministers stick to the script tonight (agreeing on a plan to disperse more Greek aid), a sustained push above this level looks likely in coming days.
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Majors
Friday’s optimistic tone has spilled over into the start of the week, reigniting demand for risk sensitive assets and sapping the safe-haven appeal of the USD.
Rather than any concrete news or data, last night’s rally appears to be driven by hope. Hope that Friday’s ‘constructive’ talks will deliver a fiscal cliff deal in the next few weeks (unlikely) and hope Greece’s next tranche of bailout cash will be signed off this week (likely).
US economic data continued its positive run, which may have also contributed at the margin. Existing home sales rose 2.1% in October (-0.2% expected), and the NAHB housing index hit the highest level since 2006.
Global equity markets have notched up gains of 1.4-2.9%, with a squeeze on short positions exacerbating the moves. The VIX index (a proxy for risk aversion) has continued to fall, and is probing recent lows around 15.5.
Oil prices, meanwhile, have made further gains as the Israel-Gaza conflict continues. Prices have jumped almost 3% overnight, to US$89/barrel.
Currency markets have produced the expected reaction to last night’s ‘risk-on’ tone. The JPY and particularly USD have underperformed, while the commodity-linked AUD and NZD have leapt to the top of the currency performance rankings.
A bounce in the EUR/USD has seen the single-currency run into resistance at 1.2805 (the 200 d.m.a). Whether it can convincingly break above here will depend on the outcome of tonight’s Eurogroup meeting. If the meeting delivers a deal to pave the way for Greece’s €44B aid tranche, a further pop in the EUR/USD is likely, perhaps to 1.2875. A breakdown in discussions would likely see support at 1.2630 tested.
The Bank of Japan decision is also due today. Given political uncertainty and the recent policy easing, we can confidently expect the BoJ to stand pat on this occasion. USD/JPY may have run up as far as it can for the time being.
Other News:
*European economic data continues to underwhelm; Italian industrial orders (-4%m/m) and European construction output (-1.4%m/m) both undershot market expectations last night.
Event Calendar:
20 November: AU RBA Board minutes; JN BoJ decision; AU RBA’s Stevens speaks; EU Finance Ministers meet; US Fed Chairman Bernanke speaks; US housing starts and building permits; 21 November: NZ GDT dairy auction; NZ credit card billings; UK BoE MPC minutes; UK public sector borrowing; US jobless claims; 22 November: NZ migration; CH HSBC Flash PMI; EU Flash PMIs; 23 November: EU German IFO.
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